Affinity Equity bets big on Korea's car rental market

The car rental business resembles financial services. Buying cars with borrowed money, renting them out and eventually selling them to used car dealers seems a lot like managing borrowed money and then trying to recover it.

But Min Byung-chul, head of Affinity Equity Partners’ South Korean operations, defines the car rental business more broadly: offering services throughout the life cycle of a car from roll-out to the scrapyard.

“The core of Affinity’s value-up strategy for SK Rent-a-Car is transforming car rental services from a simple financial business to management services through the life cycle of a car,” said Min, who also goes by his English name Charles Min.

In June, Affinity bought out SK Rent-a-Car, South Korea’s No. 2 car leasing company for 820 billion won ($615 million) from SK Networks Co.

The takeover marked the private equity firm’s first buyout since Partner Min took over as the head of its Seoul office last year upon the departure of its founding members, including former Chairman Park Young-taeg and Managing Partner Lee Chul-joo.

In 2014, Min had spearheaded Affinity’s bid for Lotte Rental Co., South Korea’s No. 1 car rental company. But it lost out to retail juggernaut Lotte Group that acquired then KT Rental for 1.2 trillion won the following year.

But Min never gave up on his pursuit of car rental companies. He offered to buy SK Rent-a-Car before it was put on the market. Its talks with SK Networks to buy the rental car unit had faltered. But it finally pulled off the deal.

GROWTH POTENTIAL

Affinity Equity is betting big on the growth potential of the car rental business.

With the high penetration of automobiles, cars are no longer something to permanently own in South Korea. Like smartphones, drivers are getting used to replacing their cars with new ones.

They also choose long-term rentals over buying cars and paying in installments.

Moreover, the private equity firm believes the car rental business will grow beyond the traditional business model of renting vehicles, recovering them, and then selling them to used car dealers.

SK Rent-a-Car could deal with aftersales services for automobiles it rents and collects and manages data on its customers and their driving history, as well as offering second-hand car rental services, without outsourcing them. Last year, it entered the certified used car market.

It also could replace cars for customers with new models every six months or year. On weekends its corporate customers may rent their cars, which would normally sit idle in parking lots, to make money.

To broaden SK Rent-a-Car's business horizon, Affinity is seeking bolt-up acquisitions of aftersales service companies and used car-trading platforms, instead of chasing small to medium-sized car rental companies.

In the short term, separation from SK Group could downgrade its credit rating and thus raise financing costs, while losing affiliated customers under the country’s No. 2 conglomerate.

But Affinity shrugged off such concerns, believing its split-up from the business group would rather increase its operating efficiency. It may outsource some operations at reasonable prices away from sister companies it had relied on.

SK Rent-a-Car could also go bolder in venturing into new businesses, which it found difficult to pursue in a bureaucratic organization.

Founded in 1998, Affinity Equity manages about $14 billion in 11 countries across the Asia Pacific.

Its portfolio companies in South Korea include Serveone Co., a product sourcing and maintenance service provider; Lock&Lock Co., a food container maker; and Burger King’s operations in South Korea and Japan.

In 2014, Affinity and KKR & Co. together netted about $4 billion from the $5.8 billion sale of South Korea’s Oriental Brewery to Anheuser-Busch InBev. That marked the most lucrative exit deal in South Korea's private equity industry.

Write to Jong-Kwan Park at pjk@hankyung.com
 


Yeonhee Kim edited this article.